Why Do CEOs Hold So Much Equity?

46 Pages Posted: 4 Jan 2015 Last revised: 25 Jul 2015

See all articles by Chris Armstrong

Chris Armstrong

Stanford Graduate School of Business

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Wayne R. Guay

University of Pennsylvania - Accounting Department

Date Written: July 23, 2015

Abstract

US CEOs hold a large amount of equity that is not explicitly constrained by ownership guidelines or vesting requirements. Although the average CEO receives a risk premium in his annual pay for holding unconstrained equity, most CEOs hold more equity than is compensated by the risk premium in their pay. We explore reasons for these seemingly voluntary equity holdings. CEOs hold more equity when they are more risk-tolerant, when their equity portfolio has a greater tax burden, and in some cases, when they exhibit greater overconfidence. Excess equity holdings are positively correlated across executives within a firm, potentially indicating the presence of firm-specific monitoring needs. We find no evidence that informed trading explains equity holdings.

Keywords: executive compensation, CEO equity incentives, corporate governance

JEL Classification: G31, G34, M41

Suggested Citation

Armstrong, Chris S. and Core, John E. and Guay, Wayne R., Why Do CEOs Hold So Much Equity? (July 23, 2015). Available at SSRN: https://ssrn.com/abstract=2544792 or http://dx.doi.org/10.2139/ssrn.2544792

Chris S. Armstrong

Stanford Graduate School of Business ( email )

655 Knight Way
E316
Stanford, CA 94305-5015
United States

HOME PAGE: http://https://www.gsb.stanford.edu/faculty-research/faculty/christopher-s-armstrong

John E. Core

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02138
United States

Wayne R. Guay (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

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